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Not Every American “Owes” the Same on the National Debt

The House majority leader Eric Cantor (R-VA) recently published an op-ed, in which he argued that “If Washington actually had the discipline to live within its means over the long term, every American citizen would not owe $46,000 toward the national debt.” The rhetoric is effective, but the logic is flawed; not every American “owes” an equal share of the national debt.

The national debt is what the federal government owes in long-term interest on government-backed bonds, Treasury bonds. Long-term Treasury bonds pay out over several decades, and have (thanks to the high credit rating of the United States government) a very low rate of interest. The bonds are used to finance spending in the short term for which there are no sufficient tax revenues in reserve.

Over the life of a given Treasury bond, the interest accruing behaves, in a sense, as government debt. It requires that future budgets cover the cost of putting sufficient funds into a pool of revenues that will eventually be paid out as interest on those bonds. The rate of interest is often not as high as the rate of inflation, making it easy to “finance” the bonds without actually spending extra cash.

At the present time, the rate of interest is actually negative on some Treasury bonds. That means investors are paying more than they expect to get back, in order to have the security of investing in US Treasury bonds, the most secure investment product in the world. The national debt is what it will cost, over time, as all interest is paid out, to finance all bond payments.

The total is not necessarily more than all the revenue that can be expected to be taken in, over the life of the securities in question, and is not necessarily unsustainable, even when it reaches such high levels as 50%, or 80% or 100% of GDP. The comparison is something of a red herring, because GDP is annual (and more than 20% of it is government spending anyway), and long-term Treasury bonds pay out over several decades. More than the percentage of current-year GDP, it is the combination of inflation, GDP growth and tax policy that will determine the viability of such debt.

There are short-term T-bills as well, which “mature” in as few as three to six months, but the full scope of the “national debt” is more about long-term borrowing than short. Deficits are not healthy, unless the level of borrowing stays within the range that credit analysts and credit issuers (bond investors) view as likely to yield a reliable return.

But the key to understanding who actually “owes” money to pay down the national debt is understanding two key components of how it is financed: first, who owes what share of the tax burden, and second, who is actually benefitting from the debt itself, or rather, who is being financed by the government’s borrowing.

In the United States, at present, there is a tragic wealth divide that has, for decades, been eroding the middle class. The wealthy hold most of the wealth and take in most of the income. The top 20% own as much as 90% of all the investment income in the country (this includes Treasury bonds), as well as 84% or more of all the wealth.

It is the wealthy who invest in stocks which benefit directly from government spending (the bottom 50% of the “income ladder” hold virtually no investments of any kind). This could be the record Defense and war spending, or record subsidies to the most profitable corporations in history, the big oil companies. Or, it could be investments that benefit from the massive direct and indirect subsidies that flow to nuclear energy generation, coal production and natural gas drilling. It could be Medicare and Medicaid spending that helps to make the private health insurance model profitable, by covering the most costly segments of the population.

The wealthy enjoy many collateral benefits of government borrowing, not least of which is the direct financing of their own investments, whether through government spending, subsidies or bond payments. Many high-end private-sector investments simply would not be viable as a secure investment, without the government’s activities doing something to support that sector or that type of financial activity.

The fact is, the national debt is made up of a cycle of borrowing and of investment income, which benefits the wealthy far more than it benefits the poor. They benefit from every one of the public services the poor struggle to benefit from, and they do so not only on the personal level, but also as an indirect subsidy to the entire scope of their private investment portfolio, which depends on the stability of the American economy and of its government’s ability to borrow and to finance borrowing.

A scientific calculation of the overall cost-to-benefit ratio of national debt financing for the wealthy or for the poor, specifically, may be too complex to flesh out without a dedicated study. But when you consider that the working poor, and much of the middle class, enjoy relatively little investment income related to government borrowing, yet must pay a significant portion of their taxes each year to finance it, the national debt is actually a system of transfer of wealth from the middle class and working poor to the wealthy.

What motivates such hostile and vitriolic rhetoric on the tax-cuts-for-the-rich side of the political spectrum, in the United States, when discussing the national debt, is the very clear fact that it is their preferred constituency that in fact owes the majority share of the national debt. The populist rhetoric of the Tea Party is often driven by the misconception that everyone in the country will be working off tens of thousands of dollars in irresponsible government borrowing, which is simply not the case.

It is a fundamentally unfair and misleading calculation to say that the national debt should be divided equally among every man, woman and child in the United States, because the equation does not balance out. Indirect beneficiaries of government borrowing cannot owe more, relative to income, than direct beneficiaries. And those who pay more in pre-tax cash to finance government borrowing than they receive in after-tax cash returns on investment, cannot owe more than those who receive more in return than they pay in.

This is not a question of class warfare or of a socialist-minded redistribution of wealth. It is just simple arithmetic: if you are reaping complex financial rewards from the system of government borrowing, you cannot ask those who are paying out of pocket to help you, but getting nothing concrete in returns, to share your burden equally.

In other words, you cannot ask a military enlisted family of four, with one low-ranking military salary and one part-time private-sector salary, and two children, to pay $46,000 to help billionaires and hedge funds manage their profits. That every single American owes $46,000 to finance the national debt is a distortion: each owes his or her own share, and those shares depend on how the pie was divided up to begin with.

6 responses to Not Every American “Owes” the Same on the National Debt

J.E. great article again! I have a couple of comments. The first is, the mechanism of inflation to offset interest has been the teat that we have been ravenously nursing our economy on since 1972 and while less so on and off since founding. On and off historically it has worked well as long as the amount of currency in circulation was not too aggressively increased to cover the interest. The problem really began when we got off the gold standard and the government and Federal Reserve were able to effectively hide the increases from most of us and much of the rest of the world.

My second point is based on the statement that the debt is not shared equally. You are correct there as well. I agree with your points. I would respectively add one other topic to the discussion as well. Not only do the relatively wealthy – I use the term relatively wealthy because, if it is correct that our economy is inflated then our true worth is only a relative number not absolute as the standard is incorrect – own more of the national debt, they also pay most of the taxes – therefore they pay back much of the debt. This is not an argument in support of the problematic allocation of wealth as it stands today. I think people with more wealth should do more. I also think that, the role that government can play in provision of programs and services paid for by those with more, is limited and typically inefficient. Instead we need to reinforce a set of national values that also helps stimulate philanthropy alongside of some limited redistribution.

Having spent quite a bit of time focused on providing services to the underserved facilitating the management government programs I can tell you that only about 20 to 30 cents of every dollar actually make their way to those in need when it is through a tax and spend method. When people behave philanthropically the yield is much higher depending on whether they flow through non-profits or not. Most, but clearly not all, non-profits range typically from 60 cents to 90 cents programmatic yield. The best is direct philanthropy where 100 cents on the dollar go to those in need.

I keep asking why we, as a people, generally do not help our neighbors much anymore – why we don’t think of our neighbors and don’t give much either of ourselves or our money. If we could re institute these values in ourselves we may find a much better solution.

Thank you, Thomas, for your comments. I agree that giving is more effective than a centralized reallocation of resources, but the question, as you note, is ultimately why we need to cover this deficit of community giving (which mirrors the deficit in services we might term a ‘market failure’—healthcare is a good example).

My contention would be that, if we were to take the Medicare/Medicaid/VA vs. private for-profit insurance conundrum (conundrum, because MMVA collectively provide an indirect subsidy to private insurers by relieving them of costs they don’t want to and don’t know how to deal with): we should explore ways to fashion massive, influential, regional non-profit health insurance cooperatives.

If non-profit hospitals, and charitable health clinics, could depend on non-profit health insurance plans to deliver over 80¢ per dollar to health costs and use the rest to actually compensate the personnel who make this possible, we could solve a major cost burden on our public sector.

I think we need to take Medicare/Medicaid et all and combine into a true safety net and reorder the entire Health Care ‘non-system’ into an effective healthcare supply chain.

The most efficient delivery systems are the industrialized models like Kaiser Health Systems. They have developed the most efficient systems. The problem is not everyone wants the limited, one size fits all approach. Part of the problem with ObamaCare is that in order to eliminate disparity, the bill does not elevate the underserved; it in effect suppresses those with means to pay by limiting their choices. To me this is counter intuitive and also damaging to the underlying economy of health care.

Our current non-integrated, non-transparent, broken economic system is the real problem. That, and our own mis-understandings as to what we should expect from the healthcare system in the first place.

We need a new system, and unfortunately, the purely non-profit approach is not the best one. We need a combination of non-profits and for profits or the economic engine that brings innovation, efficiencies and choice doesn’t happen. The problem is our perception is the current system is and has been a free market system and its not working so that solution is bad. What I cover in my upcoming book is the fact that we have never had a free market healthcare system. And the issues we face today are really caused by a collection of historical self-preservation actions taken by participants in the healthcare system and our government over the years that never have integrated nor were they meant to.

Perhaps we sould speak sometime on the phone. I would relish further dialog with you.

Your explanation is longer than my attention span can accommodate. My own perception is that since 50% of the people pay income taxes, those that do pay income taxes owe, on the average, $92,000.
Further, since taxpayers include corporations, the prices these corporations charge for their goods or services has this “debt” somehow cranked into their pricing, thus all citizens are paying for the national debt through this mechanism. I’m probably wrong, but perhaps the effect is near the target..

Its the same basic wording as, HJR-192:
“”To assure uniform value to the coins and currencies of the Unites States,

Whereas the holding of or dealing in gold affect public interest, and are therefore subject to proper regulation and restriction; and

Whereas the existing emergency has disclosed that provisions of obligations which purport to give the obligee a right to require payment in gold or a particular kind of coin or currency of the United States, or in an amount in money of the United States measured thereby, obstruct the power of the Congress to regulate the value of the money of the United States, and are inconsistent with the declared policy of the Congress to maintain at all times the equal power of every dollar, coined or issued by the United States, in the markets and in the payment of debts,
Now, therefore, be it Resolved by the Senate and House of t Representative of the United States of America in Congress assembled, that

(a) every provision contained in or made with respect to any obligation which purports to give the obligee a right to require payments in gold or a particular kind of coin or currency, or in an amount in money of the United States measured thereby, is declared to be against public policy; and no such provision shall be contained in or made with respect to any obligation hereafter incurred. Every obligation, heretofore or hereafter incurred, whether or not any such provision is contained therein or made with respect thereto, shall be discharged upon payment, dollar for dollar, in any coin or currency which at time of payment is legal tender for public and private debts. Any such provision contained in any law authorizing obligations to be issued by or under authority of the United States, is herby repealed, but the repeal of any such provision shall not invalidate any other provision or authority contained in such law.

(b) As used in this resolution, the term ‘obligation’ means any obligation (including every obligation of and to the United States, excepting currency) payable in money of the United States; and the term ‘coin or currency’ means coin or currency of the United States, including Federal Reserve notes and circulating notes of Federal Reserve banks and national banking associations.
Sec. 2 The last sentence of paragraph (1) of subsection (b) of section 43 of the Act entitled ‘An Act to relieve the existing national economic emergency by increasing agricultural purchasing power, to raise revenue for extraordinary expenses incurred by reason of such emergency, to provide emergency relief with respect to agricultural indebtedness, to provide for the orderly liquidation of joint-stock land banks, and of other purposes;, approved May 12, 1933, is amended to read as follows:

“All coins and currencies of the United Stated (including Federal Reserve notes and circulating notes of the Federal Reserve banks and national banking associations) heretofore or hereafter coined or issued, shall be legal tender for all debts, public and private, public charges, taxes, duties, and dues, except that gold coins, when below the standard weight and limit of tolerance provided by law for the single piece, shall be legal tender only at valuation in proportion to their actual weight.’

So congrss has taken the obligation of repaying the national debt but you have to ask who is SURETY. That is “US CITIZENS” which are those bonds you referenced in the form of a BONDED birth certificate. The treasury bundles the bonds. It does not change the point that we all owe equally when (if) we ever returned to intrinsic money. It’s human slavery basically. We are being deprived our own credit that we are creating by applying for a BC and its being used to trick us to think we are a “citizen” thus ASSUMING liability as the roll of surety, primarily due to ignorance.
Also, refer to the 16th amendment and realize its ALL TAX because its NOTES and they took the obligation of PAYMENT via gold act, hjr-192, stat at large above, etc.

Excuse the follow up but the point with the tax is that the 16th amendement allows UNEQUAL distribution, but it says nothing about not owing equally. Ironically it also granted no new power of taxation though according to the supreme court.

The reason for this, which seems painfully obvious to me, is that this is histories biggest ponzi scheme, and they are providing infinite credit(IMF/FED, Bretton Woods Agreement) for infinite collection. They don’t want their “notes” back after all. They know how many they issued. They want the MONEY it secures and since none of us have GOLD OR SILVER and our nation doubtfully has TRILLIONS in reserves since we already got robbed by the fed for the most part, I would assert we owe NADA. Gold, for paper that says I owe more gold? KMA! The fed as best I know has NO INTRINSIC MONEY INVESTED in this ponzi scheme. Even the presses they paid for with fed notes or were “aquired” as best I know. They have no credibility and no liability that I am aware of.

Just remember when international troops come looking for SURETY, that means YOU, because you have been completely tricked into CORPORATE PERSONHOOD through a birth certificate, 14th amendment, zip code and other ways.